Effective Negotiation Preparation to Maximize Rate Increases

By Richard Bajner and Eric Logue

How can you push for rate increases that are in line with hospital consumer price index in-creases-without placing your hospital and your own position at undue risk?

Hospitals are increasingly finding payers unwilling to increase reimbursement without sound reasoning. Hospital systems that are able to clearly articulate their "value" story have had greater success negotiating contracts that maintain current unit rate trends. Conversely, hospitals that haven't been able to back up their rate increase positions with detailed analytics have a much greater likelihood of leaving substantial revenue on the table.

What tactics work when you are trying to justify a rate increase request?

This is a sample article from HFMA's Payment & Reimbursement Forum, a subscription-based discussion community that encourages networking and sharing among reimbursement, managed care, and finance leaders.

Four Steps to Creating a Value Story

Payers are investing more resources into their analytic foundation to better benchmark hospital value profiles, including detailed cost comparisons across hospitals. We have observed the following four steps will help you define your "value" story.

Step 1: Benchmark your quality versus the market. As payment systems evolve from volume-based to outcomes-based, providers will need the necessary IT systems and analytic infrastructure to measure and monitor quality trends. It is important to view your data from a payer's standpoint so as to define the quality conversation before your payers define it for you. Risk-based payment models based on quality performance will require integrating managed care and clinical strategies in order to price your performance risk appropriately.

Some key metrics that payers currently use to shape a quality conversation include the following. All of these are based on publicly available data.

Readmission rates

Mortality rates

Surgical complication rates

Patient satisfaction scores

Process metrics and outcomes reports

Providers that can provide trended quality data to illustrate consistent high performance have had success maintaining or raising current annual rate increases.

The following exhibit illustrates one way to present comparative quality data.

Key take-away: If hospitals cannot quantify their quality positions to payers, they will likely not be able to quantify their positions to patients or employers, which would be critical if a contract negotiation went to term.

Step 2: Quantify your cost position. Achieving high quality is important to your value story; however, a national focus is forcing executives to better understand their cost positions. Health plans are investing in the capability to understand the value of the healthcare services that they are purchasing. As such, they are mining data for key cost and quality trends to create "value" positions for providers within their networks. These analytics become the foundation for their network strategy as they attempt to shift volume to high-quality, low-cost facilities.

A health system was recently able to demonstrate its high-quality, low-cost position using the following graphic, which defined the system's importance to the payer early in negotiations.

Key take-away: If a hospital has low costs, high quality, and low margins, an increase to rates is justifiable.

Step 3: Identify your rate position versus the market. The most difficult and complex step relates to quantifying your rate position versus the market. While payers have rate information for their networks, providers are often left to benchmarking their rates by comparing their discounts versus the market. Such analysis assumes similar charge positions, yet our research indicates tremendous charge variances within markets.

A more detailed and accurate benchmarking can help you quantify your rate position for inpatient and outpatient services-down to DRG and CPT detail levels.

Triangulating your market position can be achieved by benchmarking your rates to different data sets, including:

As a percentage of the local/regional market

As a percentage of Medicare

Identifying specific areas where rates fall below the market has helped providers negotiate better terms that can be implemented immediately or through a phased-in approach over time.

Knowing where you need to defend a premium price versus where you should achieve mar-ket parity is a negotiating advantage, especially if you can integrate your quality and cost story into your rate benchmarks. Recently, we helped one community hospital benchmark its rates versus market and Medicare by service line, using a single graphic to illustrate markups versus both market and Medicare by service line (see the exhibit below). This visual representation helped communicate rate opportunities and vulnerabilities to executives in order to integrate unit reimbursement rates into a larger strategic margin plan.

Key take-away: Hospitals need to understand their market positions. Justification for increased rates is related but separate from determining if the market will bare a rate increase. Hospitals can start by benchmarking their own payer rates against each other.

Step 4: Define how your services are differentiated. Through your first three steps, you've already benchmarked your cost, quality, and rates versus the market. So you're on your way to showing how you are differentiated. But asking yourself these additional questions will round out your story:

What services do you provide that aren't offered elsewhere in the community?

For what services are you considered the highest-quality provider?

For what services do you have a technology advantage?

What are your growth services?

Summarizing your analysis into a single graphic quickly tells your story. For example, in the following exhibit, cardiac services have a rate, cost, and quality advantage. However, the service has seen volumes decline over recent years. Pushing rate increases to a service with volume losses may not maximize future revenue. In contrast, orthopedics has both a quality and cost advantage as well as volume growth with rates below market averages. Negotiating rate increases for orthopedics will maximize future reimbursement given the strong volume growth in this service line.

Hospitals can use this service line differentiation tool to identify and analyze how service lines compare to the market. In this example, the hospital's cardiac services have a rate, cost, and quality advantage. However, the service has seen volumes decline over recent years. Pushing rate increases to a service with volume losses may not maximize future revenue. In contrast, orthopedics has both a quality and cost advantage as well as volume growth with rates below market averages. Negotiating rate increases for orthopedics will maximize future reimbursement given the strong volume growth in this service line.

The Bottom Line

Providers with an organized approach to quantifying their value propositions and being able to effectively communicate that value to key stakeholders, including payers, physicians, patients, and employers, are in a much stronger negotiating position. Failing to do this prior to the negotiation creates risk of reduced hospitalwide margins and reduced credibility of the negotiators.

How can you push for rate increases that are in line with hospital consumer price index in-creases-without placing your hospital and your own position at undue risk?

Hospitals are increasingly finding payers unwilling to increase reimbursement without sound reasoning. Hospital systems that are able to clearly articulate their "value" story have had greater success negotiating contracts that maintain current unit rate trends. Conversely, hospitals that haven't been able to back up their rate increase positions with detailed analytics have a much greater likelihood of leaving substantial revenue on the table.

What tactics work when you are trying to justify a rate increase request?

This is a sample article from HFMA's Payment & Reimbursement Forum, a subscription-based discussion community that encourages networking and sharing among reimbursement, managed care, and finance leaders.

Four Steps to Creating a Value Story

Payers are investing more resources into their analytic foundation to better benchmark hospital value profiles, including detailed cost comparisons across hospitals. We have observed the following four steps will help you define your "value" story.

Step 1: Benchmark your quality versus the market. As payment systems evolve from volume-based to outcomes-based, providers will need the necessary IT systems and analytic infrastructure to measure and monitor quality trends. It is important to view your data from a payer's standpoint so as to define the quality conversation before your payers define it for you. Risk-based payment models based on quality performance will require integrating managed care and clinical strategies in order to price your performance risk appropriately.

Some key metrics that payers currently use to shape a quality conversation include the following. All of these are based on publicly available data.

Readmission rates

Mortality rates

Surgical complication rates

Patient satisfaction scores

Process metrics and outcomes reports

Providers that can provide trended quality data to illustrate consistent high performance have had success maintaining or raising current annual rate increases.

The following exhibit illustrates one way to present comparative quality data.

Key take-away: If hospitals cannot quantify their quality positions to payers, they will likely not be able to quantify their positions to patients or employers, which would be critical if a contract negotiation went to term.

Step 2: Quantify your cost position. Achieving high quality is important to your value story; however, a national focus is forcing executives to better understand their cost positions. Health plans are investing in the capability to understand the value of the healthcare services that they are purchasing. As such, they are mining data for key cost and quality trends to create "value" positions for providers within their networks. These analytics become the foundation for their network strategy as they attempt to shift volume to high-quality, low-cost facilities.

A health system was recently able to demonstrate its high-quality, low-cost position using the following graphic, which defined the system's importance to the payer early in negotiations.

Key take-away: If a hospital has low costs, high quality, and low margins, an increase to rates is justifiable.

Step 3: Identify your rate position versus the market. The most difficult and complex step relates to quantifying your rate position versus the market. While payers have rate information for their networks, providers are often left to benchmarking their rates by comparing their discounts versus the market. Such analysis assumes similar charge positions, yet our research indicates tremendous charge variances within markets.

A more detailed and accurate benchmarking can help you quantify your rate position for inpatient and outpatient services-down to DRG and CPT detail levels.

Triangulating your market position can be achieved by benchmarking your rates to different data sets, including:

As a percentage of the local/regional market

As a percentage of Medicare

Identifying specific areas where rates fall below the market has helped providers negotiate better terms that can be implemented immediately or through a phased-in approach over time.

Knowing where you need to defend a premium price versus where you should achieve mar-ket parity is a negotiating advantage, especially if you can integrate your quality and cost story into your rate benchmarks. Recently, we helped one community hospital benchmark its rates versus market and Medicare by service line, using a single graphic to illustrate markups versus both market and Medicare by service line (see the exhibit below). This visual representation helped communicate rate opportunities and vulnerabilities to executives in order to integrate unit reimbursement rates into a larger strategic margin plan.

Key take-away: Hospitals need to understand their market positions. Justification for increased rates is related but separate from determining if the market will bare a rate increase. Hospitals can start by benchmarking their own payer rates against each other.

Step 4: Define how your services are differentiated. Through your first three steps, you've already benchmarked your cost, quality, and rates versus the market. So you're on your way to showing how you are differentiated. But asking yourself these additional questions will round out your story:

What services do you provide that aren't offered elsewhere in the community?

For what services are you considered the highest-quality provider?

For what services do you have a technology advantage?

What are your growth services?

Summarizing your analysis into a single graphic quickly tells your story. For example, in the following exhibit, cardiac services have a rate, cost, and quality advantage. However, the service has seen volumes decline over recent years. Pushing rate increases to a service with volume losses may not maximize future revenue. In contrast, orthopedics has both a quality and cost advantage as well as volume growth with rates below market averages. Negotiating rate increases for orthopedics will maximize future reimbursement given the strong volume growth in this service line.

Hospitals can use this service line differentiation tool to identify and analyze how service lines compare to the market. In this example, the hospital's cardiac services have a rate, cost, and quality advantage. However, the service has seen volumes decline over recent years. Pushing rate increases to a service with volume losses may not maximize future revenue. In contrast, orthopedics has both a quality and cost advantage as well as volume growth with rates below market averages. Negotiating rate increases for orthopedics will maximize future reimbursement given the strong volume growth in this service line.

The Bottom Line

Providers with an organized approach to quantifying their value propositions and being able to effectively communicate that value to key stakeholders, including payers, physicians, patients, and employers, are in a much stronger negotiating position. Failing to do this prior to the negotiation creates risk of reduced hospitalwide margins and reduced credibility of the negotiators.

Victoria Terekhova, senior strategist for Enterprise Healthcare at KeyBank, discusses key challenges when developing long-term strategy in a rapidly changing industry, and the role the right banking partner can play in helping healthcare providers navigate the opportunities before them.